Haimeng Wang

ANALYSIS OF THE RISK MANAGEMENT THIRD-PARTY LOGISTICS IN CHINA

Bachelors thesis

Supply Chain Management

Forssa 06.09.2012

Wang Haimeng

ABSTRACT

HAMK Forssa

Degree Programme in Supply Chain Management

Author Year 2012

Wang Haimeng

Subject of Bachelors thesis Analysis of the Risk Management Third-Party Logistics in China

ABSTRACT

As the market competition continues to deepen and intensify, the enterprisess to estab-

lish a key of competitive advantages has been turned from reducing material comsump-

tion and improving labor productivity to building efficient logistics system. With the

further economic development, the enterprise put forward ever-increasing demands for

the development of logistics. Ones own or collaborative logistics ways may not be able to fulfill some enterprisess requirements, the enterprises that have new logistics de-mands are increasing as well, which are the motivation to promote logistics outsourcing.

Simultaneously, with the development of modern traffic network, transport and high

technology, also make the logistics enterprises have been repid progress, so more and

more enterprises logistics outsourcing operations will be possible.

Firstly, this thesis gives a brief review of relevant existing research results, on such a

basis that it will seek to research whether and what kinds of risks exist in 3PL subcon-

tracting and the effective approaches to deter and control thus risks in China. To sum up,

the research objectives of the paper mainly include the following aspects:

To achieve a general overview of 3PL development in China To obtain a deep understanding on risk and 3PL risk management To explore the importance and approaches to manage risks To identify various risks existed in 3PL risks To research the root causes of these 3PL risks To find out effective and efficient risk management methods

Keywords Risk, Subcontracting, Outsource, 3PL

Pages 43

CONTENTS

1 INTRODUCTION ....................................................................................................... 1

1.1 Research background .......................................................................................... 1 1.2 Research objectives ............................................................................................. 2 1.3 Outline structure of this research ........................................................................ 2

2 LITERATURE REVIEW ............................................................................................ 3

2.1 Introduction ......................................................................................................... 3

2.2 The definition of risk ........................................................................................... 3

2.2.1 Risk is the indeterminacy of the possible outcome of a thing ................. 3 2.2.2 Risk is the indeterminacy of loss ............................................................. 3

2.2.3 Utilize the randomness characteristic of indeterminacy to define risk 4 2.3 Risk management ................................................................................................ 4

2.3.1 Contract management .............................................................................. 5 2.3.2 Risk sharing ............................................................................................. 5 2.3.3 Risk management procedures .................................................................. 5

2.4 Risk in 3PL .......................................................................................................... 6

2.4.1 General introduction of 3PL .................................................................... 6 2.4.2 3PL risks .................................................................................................. 7

2.4.3 Cause factors of 3PL risks ....................................................................... 7 2.4.4 Effects of 3PL risks ................................................................................. 9

2.4.5 3PL risk management .............................................................................. 9 2.5 3PL in China...................................................................................................... 10

2.5.1 Lack of large-scale and strong third-party logistics providers in China 10 2.5.2 With the help of 3PL subcontracting ..................................................... 11 2.5.3 Low trust level ....................................................................................... 12

2.5.4 Dynamic external environment: both opportunity and challenge ......... 12 2.6 3PL risk control and management ..................................................................... 12

2.6.1 Risk analysis and identification ............................................................. 12 2.6.2 Risk early warning ................................................................................. 12 2.6.3 Risk control ........................................................................................... 13

2.7 Summary ........................................................................................................... 13

3 RESEARCH METHODOLOGY .............................................................................. 14

3.1 Introduction ....................................................................................................... 14

3.2 Research methodology ...................................................................................... 14 3.2.1 Research philosophy .............................................................................. 14 3.2.2 Quantitative versus Qualitative ............................................................. 15 3.2.3 Deductive versus Inductive ................................................................... 16

3.3 Research strategy............................................................................................... 17

3.3.1 Primary data versus secondary data ...................................................... 17 3.3.2 Interview ................................................................................................ 18

3.4 Data collection................................................................................................... 19

3.4.1 Sampling ................................................................................................ 19 3.5 Data analysis ..................................................................................................... 20 3.6 Limitations ........................................................................................................ 20 3.7 Ethical issues consideration .............................................................................. 22

4 FINDINGS, ANALYSIS AND DISCUSSION ........................................................ 23

4.1 Introduction ....................................................................................................... 23 4.2 Findings on 3PL advantages ............................................................................. 23 4.3 Findings on 3PL disadvantages ......................................................................... 24

4.4 Findings and analysis on methods to select 3PL providers ............................... 24 4.5 Findings and analysis on risks existing risks in 3PL operation ........................ 24

4.5.1 Risk 1: the market of logistics subcontracting is immature .................. 24 4.5.2 Risk 2: the objectives of logistics subcontracting are not clear ............. 25 4.5.3 Risk 3: the scope of logistics subcontracting cannot be determined ..... 25

4.5.4 Risk 4: the position set for the contractor is not exact .......................... 26 4.5.5 Risk 5: make an error in choosing contractors ...................................... 26

4.5.6 Risk 6: wrong decisions of logistics subcontracting ............................. 26 4.5.7 Risk 7: sign improper contract with the contractor ............................... 27 4.5.8 Risk 8: the conflict of the inner labours ................................................ 27 4.5.9 Risk 9: management information leaks ................................................. 27 4.5.10 Risk 10: there is no effective evaluation of service performance ......... 28

4.5.11 Risk 11: it cannot effectively plan and organize logistics ..................... 28 4.5.12 Risk 12: it cannot effectively communicate and negotiation ................ 28 4.5.13 Risk 13: it cannot evaluate the interim results of companys logistics

subcontracting correctly ......................................................................................... 29

4.6 Findings on whether and how the risks could be controlled ............................. 29 4.7 Findings and analysis on risk management approaches .................................... 30

4.8 Discussion on findings ...................................................................................... 31

5 CONCLUSION AND RECOMMENDATION ........................................................ 33

5.1 Conclusion ......................................................................................................... 33 5.2 Recommendation ............................................................................................... 34

5.2.1 To create a fully competitive environment for subcontracting ............. 34

5.2.2 To build an effective management team for subcontract project .......... 35 5.2.3 The implementation of effective methods on logistics subcontracting

business management ............................................................................................. 35 5.2.4 The establishment of logistics subcontracting information-sharing

mechanism .............................................................................................................. 35

5.2.5 Establish a profit sharing and risk-sharing mechanisms ....................... 36 5.3 Limitation and further research ......................................................................... 39

6 SUMMARY .............................................................................................................. 41

7 SOURCES ................................................................................................................. 43

Analysis of the Risk Management Third-Party Logistics in China

1

1 INTRODUCTION

1.1 Research background

In the 21st century, accompanying the substitute of the competitive rela-

tionship by the win-win relationship along supply chains and the for-

mation of specialized management theory, there has come the issue of lo-

gistics subcontracting. Logistics subcontracting has become a develop-

ment tendency in modein times. Most leaders believe 3PL subcontracting

enables companies to focus on their own core competences and optimise

the process of logistics along their supply chains (Simchi-Levi et al.,

2003). Hence, more and more interest and emphasis have been put on 3PL

subcontracting to enhance their supply chain performance management

and obtain advantages that are more competitive

According to the report of IDC (2005) EU logistics markets on average

has grown 3.3% annually. According to research, in 2005 logistics sub-

contracting market was 53.9 billion US dollars. In 2007, the value of glob-

al logistics subcontracting services market increased to 276.5 billon US

dollars.

The report from the Chinas National Bureau of Statistics (2009), there were more than 1 million logistics enterprises in China in 2006. The 3PL

providers as coordinators of corporation operation, integrators of logistics

and contractors of logistics outsourcing have become mainstream modern

logistics. Striving to develop 3PL is an important way to promote Chinas economy quality, since 1990s Chinas 3PL has make considerable head-way (CFLP 2007).

As illustrated in the table 1, in 2007 most of Chinas corporations adopted 3PL service to improve logistics efficiency.

Table 1

Quantity of

corporation use

3PL service

1 2-3 4-10 10+

Percentage 3% 31% 45% 19%

Source: CAWS (2007)

With 3PLs popularized in China, a series of serious problems have emerged imposing a heavy and potential loss to the whole system, includ-

ing corporations, 3PL providers and whole supply chain, hence, it is high-

ly essential to ascertain, deter and control these problems in subtracting.

, An investigation, carried out in China since several years on 3PLs by

Zhao et al. (2007) states that empirical studies are still in their infancy and

immature. Plus its vitality and necessity to mature, the research of 3PL

subcontracting risk management in China is worthy of investigation.


2

1.2 Research objectives

This study will seek to research what kinds of risks exist in 3PL subcon-

tracting and the effective approaches to prevent and control thus risks in

China. The scope of this study will focus on 3PL subcontracting problems

management in Chinas SMEs.

The detailed research objectives aim:

To achieve a general overview of 3PL development in China

To obtain a deep understanding on risk and 3PL risk management

To explore the importance and apptoaches to manage risks

To identify various risks existed in 3PL subcontracting

To research the root causes of thses 3PL risks

To find out effective and efficient risk management methods

1.3 Outline structure of this research

The structure of this study is revealed as follows:

Chapter 2 this chapter will critically review existent literature in 3PL risk and risk management fields. It identifies the definition and character-

istics of risks in a general perspective then deepens the understanding in

the approaches in risk management and 3PL risk management. Basic risk

management procedures are provided. It is summarised that ineffective

management, loss of control, loss of client focuses, lack of clarification,

lack of cost control, lack of cost control, lack of trust and double outsourc-

ing are main factors of 3PL risks. A framework of 3PL risk management

and control is formulated as well. This chapter plays an important role as

theoretical framework in this study.

Chapter 3 the chapter discusses different research paradigms and intro-duces the research philosophy, research strategy, and research methods,

for this study always talk about the reasons supported for the research

methodology selection. The method of data analysis is introduced as well.

At the end of this chapter, research validity, reliability, and generalisabil-

ity also ethics issues are explained and analysed.

Chapter 4 this chapter describes, analyses, and discusses the findings by this research. The 3PL subcontracting risks are identified and practical

methods to evaluate and control risks in case company. Discussion is car-

ried out by comparing existent theory and practical findings.

Chapter 5 in this chapter, the key findings are showed. Recommenda-tions are given with managerial implications in 3PL subcontracting risk

management. Finally, the limitations of this study and suggestions for fur-

ther study are explained.


3

2 LITERATURE REVIEW

2.1 Introduction

This chapter, according to the objectives, firstly identifies the definition of

risk and risk management in a general manner and then explore the cause

factors of 3PL risks and potential effects of such risks in a detailed man-

ner. Due to highly linkage to the logistics business environment of China,

the general conditions and special characteristics of 3PL development will

be evaluated. Finally, it will seek out methods to manage and control 3PL

risks.

2.2 The definition of risk

Currently, academia has no standard definition of risk since people have different understandings of risk, or, they research risk from different viewpoints (Ojasalo, 2009)In order to start this research with clear under-

standing of this topic, it is of great importance to begin with the definition

of risk. The review hereby sums up some main perspectives according to

the scholars different understandings to risk.

2.2.1 Risk is the indeterminacy of the possible outcome of a thing

Kendrick (2003) called risk as indeterminacy; Heldman (2005) defined

risk as the variation of the outcome under some specific suppositions; it is

thought that risk is a things indefinability, which can be detected by vari-ance of the earning distribution. Meh (2008) believed that risk is the inde-

terminacy of a companys earning. Through systematic study of the risk, Lambert et al. (2008) define risk as the so-called risk is the objective re-flection of uncertainty of not occurring incident. Meanwhile, Markowitz and Sharp used variance of yield rate to measure the risk of investment se-

curities and through quantify the risk, they changed the masss perception to risk. Since it is convenient to calculate variance, such kind of risk defi-

nition received prevailing application in practice.

2.2.2 Risk is the indeterminacy of loss

Virine and Trumper (2007) defined risk as the indeterminacy of loss. Un-

certainty brings risk Hillson (2007) believed risk meant the indeterminacy

of future loss. Proske (2008) defined risk as the chance of adverse inci-

dent. This viewpoint was also categorized into subjectivity theory and ob-

jectivity theory. Subjective theory believed the indeterminacy is subjec-

tive, individual and psychological perspective, and is a mans subjective estimation to an objective thing instead of the objective evaluation and

measurement. Indeterminacy includes the indeterminacy of the occurrence

of a thing, the indeterminacy of time, the indeterminacy of the situation

and the indeterminacy of severity of the thing. The objectivity theory was

posed upon the objective existence of risk and based on observation to the


4

risk incidents, and was defined according to mathematics and statistics.

Objectivity theory believed risk can be measured by objective items. For

example, Dhaene et al. (2006) defined risk as the objective probability that

can be measured; Knight (2009) believed risk can be measured too.

2.2.3 Utilize the randomness characteristic of indeterminacy to define risk

According to Huang (1999) the indeterminacy of risk includes two kinds fuzziness and randomness. The indeterminacy of fuzziness mainly de-

pends on the innate fuzzy attribute of risk itself, and should be described

and researched by fuzzy mathematics. Whilst, the indeterminacy of ran-

domness is mainly due to the influence from various kinds of random fac-

tors from the exterior environment and should be described and researched

by probability theory and statistics. Aubert et al. (2003) said "risk refers to

the uncertainty faced by economic actors, either directly or indirectly im-

pact on the economic activities and can not be fully accurately analyzed, it

contains a variety of unforeseen factors; and the risk depends not only on

uncertainties in the size of the uncertainty, but also depends on the nature

of income function (Johnson, 2009).

According to the randomness of indeterminacy, Kallman (2005) posed ap-

proaches to measure the degree of some potencial risk. That is the ratio

of mean error of actual loss and anticipated loss to the mathematic an-ticipated loss under some specific conditions and timing. It shows the es-timation of various degrees of potential loss (Proske, 2008).

To sum up, the definition of risk is that it originates from indeterminacy,

which might cause loss and various kinds of random factors, which could

lead to indeterminacy in risks. "At present, on a more consistent view of

risk is: Risk is the uncertainty in a number of people under the influence of

purposeful behavior, Compared with expectations in terms of the interests

of the possibility of loss. With a simple word, risk refers to the possibility

of future as a result of various factors leading to uncertainty of future loss-

es (Grant et al., 2006). Because this research is discussed around the risks

in 3PL, according to the natures of risk, the research focus will be cover

kinds of factors leads to 3PL risks, and how loss has been caused.

2.3 Risk management

A good risk management helps reduce the probability of wrong decision

and helps avoid potencial loss, and helps increase the assed-value of the

company. Currently, risk management already becomes a relatively inde-

pendent and functional managerial field in the companys management. In literature, there are several approaches, which are closely related to effec-

tive risk management.


5

2.3.1 Contract management

When a company is confronted with an open market, with an open season

of laws and regulations, and with innovated products, the changes and

fluctuations become more and the operational risk is enhanced accordingly

(Ballot, 2007). An inability to meet fixed obligations or fulfill investment

plans. Some constraints are probably especially severe in emerging mar-

kets, where within-business-group internal capital markets might provide

the best solution.

2.3.2 Risk sharing

Risk sharing may exist if firms maximize the joint utility of their corporate

constituents, including employees, financial institutions, stockholders, and

management (Aoki 1984, 1988). Some of these constituencies, who can-not diversify their human capital, such as managers and employees, are

naturally risk averse and the smoothing of negative outcomes can enhance

their utility (see also Bertrand 2004 on risk-sharing contracts between

firms and employees). If risk sharing reduces the required compensation

for hired managers, it may be beneficial to shareholders as well (Hermalin

and Katz 2000). In addition, risk sharing reflected in intervention in times

of distress can be economically efficient if it conserves human capital that

would otherwise be dissipated.

In terms of the companys operation and development goal, risk manage-ment also has a great significance with operation and strategic manage-

ment.

2.3.3 Risk management procedures

The basic procedures of risk management are, risk awareness, risk testing,

and risk assess, risk control and managerial effect evaluation etc. (Dorf-

man, 2007)

Risk awareness: risk awareness means that an economic union or an indi-

vidual judge and summarize the faced and potential risks and identify the

risks attributes. However, awareness of risk is different; for do not have a commonly accepted definition (Bowersox & Closs., 2004).

Risk testing: risk testing means that based on risk awareness, the research-

er utilizes probability theory and statistics to analyze the massive collected

data and estimate and anticipate the probability of loss and relevant loss

degree. Risk testing includes loss frequency and loss degree.

Risk management method is divided into control and financing. Control aims to reduce the loss degree and change different conditions that might

lead to incidents and larger loss. Financing means the financing ar-rangement before the loss occurrence.


6

Risk managerial effect evaluation: it means that the researcher analyzes

and compares the outcome with the expectation to judge the evaluations rationality, adaptability and profitability (White, 2009).

In addition, the risk management goals and procedures could be composed

by two parts: risk management goal before occurrence of loss and risk

management goal after the loss. The former aims to reduce or avoid the

chance of risk incidents, including saving operational cost and anxiety.

The latter one aims to recover the situation after loss occurrence. It in-

cludes maintaining the enterprises on-going survival, on-going production and service, stable income, sustainable production growth and social lia-

bility. The two goals integrate effectively to form a completed and sys-

tematic set of risk management goal (Hubbard, 2009).

2.4 Risk in 3PL

Nowadays, 3PL has gained a great deal of attention not only in academic

research fields but also in practical operations. The concept of 3PL has

been developed from the need to extend transportation services by trans-

portation companies to its customers. Basically, 3PL might be defined as

outsourcing of transport and logistics activities to outside companies that

are neither consignors nor consignees. Usually there is outsourced more

than one activity, including storage, warehousing, and transportation. 3PL

came into existence during the deregulation of freight transport industry in

the 1980s, and has progressed in the 1990s along with the development of

information technologies (Skjoett-larsen, 2000; Lumsden, 2003).

2.4.1 General introduction of 3PL

Third-party logistics generates based on the sub-contract of manufacturing

and service business. With the global market Growing logistics it requests

more services, a growing number of third-party logistics providers seek

cooperating and coalition partners (Bowersox & Closs, 2004). Co-

operation partners in some cases can be other third-party logistics provid-

ers, as well as including a range of suppliers, such as freight forwarders,

cargo handling operators, warehouse managers, software providers and fi-

nancial service providers and so on (Hammer & Champy, 2005). The 2004

survey shows among 21 third-party logistics providers, there are 16 at the

same time at least has one partner (Christopher, 2005). So far, the majority

of third-party logistics providers have multiple partners. Third-party logis-

tics subcontract is a form of cooperation and alliance (Christopher, 2004).

According to different service functions provided by The Third-party lo-

gistics sub-contractors, it can be sub-divided into (Russell, 2004) transport

sub-contractors, storage sub-contractors, freight forwarding sub-

contractors.

There are strong reasons supporting 3PL outsourcing

Superior quality

Better timeliness


7

Lower cost

2.4.2 3PL risks

It is normally believed that risks exist everywhere. To be dynamic in sup-

ply chain management, 3PL does have risks as well. Third-party logistics

provider for the process of subcontract is beyond the control of uncertain-

ty, which leads to the emergence of the subcontract risk. This shows that

the risk of third-party logistics refers to the sub-contractors because of the

environment and conditions of uncertainty, the most subcontract results

and third-party logistics providers have deviated from the expectations and

it brings for third-party logistics providers the possibility of loss (DM

Lambert, JR Stock, 2003).

According to Hammer and Champy (2005), 3PL risk is objective. The ex-

istence of risks in 3PL has also been proven by other researchers. The ob-

jectivity of the risk refers to the existence of risk does not depend on the

people's will, regardless of whether the risk subjects can aware of the ex-

istence of risk, risk in certain circumstances must occur (Thomas, 2007).

Fowler (2004) analyses the risks in third-party logistics, which can be

broadly divided into political risks, financial risks, capacity risk, and col-

laboration risk.

It is also found that 3PL risk and profits have the nature of symmetry. In

the view of Choy et al. (2007) as for risk subjects, the subcontract risks

and benefits are on equal footing, that is, income is for the price of a cer-

tain degree of risk. Third-party logistics providers in order to obtain a cer-

tain amount of revenue are necessary to assume the corresponding risks

(Hult et al., 2004). So does client firms.

In addition, the 3PL risks are highly changeable. In different circumstanc-

es, the risk of 3PL could change. As 3PL service providers and the envi-

ronment itself changes, 3PL risks would change (Liu et al., 2008).

2.4.3 Cause factors of 3PL risks

Because 3PL operation holds the nature of volatility, whether make-or-buy

such logistics service and how to carry out 3PL outsourcing is of great

managerial implications (Burt et al., 2003). Before making such decisions,

it requires investigation not merely on cost but also in potential risk fac-

tors. In the research of Burt et al. (2003), it is found that there are several

factors as following, which may lead to 3PL risks.

Ineffective management According to Burt et al. (2005), 3PL risks might be caused by ineffec-

tive management in logistics outsourcing services. The 3PL service

providers might not perform the operation better than the client com-

pany itself, due to ineffective management capability (Vasiliauskas &


8

Jakubauskas, 2007). An external 3PL service provider might not be

sensitive and does not understand client organizations need as deep as itself. Careless 3PL service subcontracting would cost more than

keeping in-house. It is possible to avoid such problem by developing

careful prequalification to providers on efficiency, effectiveness, and

total capabilities and carry out service level agreements clearly.

Loss of control Outsourcing the logistics process to an external provider might cause

loss of control (Burt et al., 2003). Overdependency and inadequate in-

volvement might cause potential risks. A company might lose key in-

formation to manage the business effectively.

Loss of client focus Reasons to outsourcing logistics service differ from one company to

another. It is often realised that there is interest conflict and missed

match in business plan and strategy between 3PL providers and client

organisations.

Lack of clarify Failure to clarify the obligations and responsibilities leads to 3PL risks

in future. It is stressed that a clearly specified agreement could prevent

this problem.

Lack of cost control Although most of logistics outsoucing starts from cost saving consid-

eration, many potencial risks are still produced by lack of cost control

(Giannakis & Croom, 2006). Especially when there is without appro-

priate incentive in contract, the 3PL providers could not be motivated

to promise the same level of quality with less cost.

Lack of trust If the trust between the two parties is not high, it will bring risks and

cause high failure rate of 3PL Cooperation. Trust between the two side

can complete a particular behavior (Knight, 2009). In the market, in-

formation asymmetries, incomplete contracts and other reasons, the

third-party logistics providers have adverse selection, so does it has

moral hazard. Because of the existence of doubts about the credibility

of 3PL service providers, in the cooperation process, client firms have

to increase input costs of supervision to avoid the risk of the occur-

rence, potential profits and cost saving are reduced. Because of the ex-

istence of supervision, it means that there is not enough trust, and trust

with the infection to enhance the supervision will reduce the trust of

third-party logistics providers, (Xu, 2003). The results make the mutu-

al trust lose, and undermine the cooperation between two sides, and

even affect the extent of the efforts, even reduce the level of service or

delay in delivery, which eventually lead to the failure of 3PL co-

operation (Bowersox, 2003).

Double outsourcing


9

In present, the practice of double outsoucing is not rare but quite

common. It is much more important to obtain expected outcomes ra-

ther than who fulfill it. Under such conditions, problems often occur.

The agreement between 3PL providers and client organisation does

not tie down the subcontractors (Williamson, 2005). Utilising logistics

outsourcing providers subcontractors might leave problems to client firms to control over (Wang et al., 2008).

2.4.4 Effects of 3PL risks

As was pointed out, risks bring loss due to uncertainty and the existence of

risks in 3PL is objective. What kinds of loss or effects might be produced

by 3PL risks is worthy researching.

Reject from internal staffs: according to Lang and Ding (2008), logistics

subcontract can influence corporations internal operation process, all of business flow will be changed when the corporation apply the logistics

subcontract, stuffs may reject this change and infullence daily operaiotn.

Customer satisfactory reduced: from view of Kersten and Blecker (2006),

the corporation cannot obtain valuable information from costomer and im-

prove products if it rely on third patry logistics provider and cannot con-

trol it. In doing so, third party logistics provider loosing control can be due

to the corporation core business meeting barriers and customer satisfaction

will be reduced.

The corporation suffers loss: the third party logistics provider may think

the corporation lacks technology and skill in logistics, and improve the

price on subcontract or provide inferior service, (Huang and Li, 2009).

2.4.5 3PL risk management

Risk management of third-party logistics has broad and narrow meaning

of the points.

The Narrow 3PL risk management includes third-party logistics providers internal operational risks and the core aspects to avoid the disposal risks,

which are to identify and control risks. How to prevent and control risk are

the key issues when any businesses face risks and loss pressure they must

be addressed (Lynch, 2004).

Broader 3PL risk management of third-party logistics refers to the third-

party logistics providers and client organizations through the potential ac-

cidents or loss identification, measurement, analysis and control use eco-

nomic and rational approach to deal with all risks together as well as the

loss in logistics outsourcing process in order to achieve maximum safety

and security (Lisa, 2009). It is through the whole process of outsourcing and is a scientific management method; the risk management process

could be divided into five steps: risk identification, risk prediction, the risk


10

management measures and decision-making to take the best means, im-

plementation impact assessment of choice of means (Taniguchi et al.,

2004).

As for the risks of double outsourcing, it is normally related to virtual lo-

gistics enterprises. This refers to a number of complementary resources

and technical members of the enterprises, in order to achieve the logistics

resources and risks sharing, complementary advantages such as the char-

acteristics of strategic objectives (Xu et al., 2006), while maintaining the

independence of their own conditions, to establish the dynamics and rela-

tively stable partnership. Third-party logistics subcontract itself is a form

of co-operation of virtual logistics enterprises (Fandel & Reese, 2005). In

the cooperation process, the third-party logistics providers are mainly re-

sponsible for the projects of subcontract, and for sub-contractors to carry

out the role of guidance and supervision (Martin Christopher, 2004).

2.5 3PL in China

In China, 3PL transforms and develops around the customers as the central

value quickly in recent years. Due to various factors, there are special na-

tures of 3PL operation in China.

2.5.1 Lack of large-scale and strong third-party logistics providers in China

Chinese 3PLs strength is still in small-scale and the tatal cost of logistics outsourcing is high. A single sub-service functions, types and Narrow

scope, the services is relatively low technological level, and only 30% of

third-party logistics providers choose sub-contractors to assist the logistics

business (Hao, 2003). The overall trend of the development of modern lo-

gistics is toward large-scale, large-scale development to achieve econo-

mies of scale, lower total cost of logistics, and enhanced competitive ca-

pacity (Bayles, 2009). From the scope to functions of 3PL services in Chi-

na, there is large gap compared to developed countries.

The focuses of the majority of Chinese 3PL providers are concentrated on

the performance of transportation, warehousing and other general services,

the consideration on the flow of processing, information management,

customs clearance and other operational aspects of logistics value-added

proportions are quite few (Lai et al., 2008). In China, 3PL service provid-

ers have single function, because the majority of companies only focus in

a specific logistics services. Although many traditional large-scale logis-

tics enterprises have been transformed into third-party logistics providers,

but the transportation and storage are still the dominant part of the busi-

ness and other features of third-party logistics services are still not perfect

(Hao, 2003). In addition, the rapid development of information technology

in recent years, logistics service logistics information for both the demand

for attention. However, the whole of China's enterprises, information is in

a late start, the low level of information technology, the logistics of infor-


11

mation in the acquisition, analysis, processing, utilisation of capacity is

not strong, which lead with customers, 3PL providers in the process of co-

operation, can not fully share information resources and can not form in-

terdependent partnership (Choy et al., 2006).

2.5.2 With the help of 3PL subcontracting

It is found that in China the demand side reduces the logistics service pro-

viders. 3PL providers adapt to the demand, are more inclined to sign logis-

tics service contracts with customers, and make their commitment to the

logistics services (Virilio & Camiller, 2009).

Due to the demand side of the logistics, in order to reduce transaction

costs, 3PL providers in order to strengthen the management and logistics

business monitoring, tend to employ more and more logistics sub-

contractors (Wei Shi Lim, 2003), which causes third-party logistics pro-

viders to have an increasing tendency to provide an integrated service.

With the increasingly fierce market competition, enterprises production and operation have gradually from the mass marketing with fewer species

and high-volume characteristics shift to differences marketing stage with

multi-species and small-volume characteristics which emphasize on mar-

ket-oriented (Xie & Xu , 2005). This requires that third-party logistics

providers meet market demand with the personalized services (Rushton et

al., 2000). At the same time, as the internal logistics integration between

enterprises, logistics facilities and equipment have improved, the man-agement level has been improved, and many third-party logistics providers

increasingly have to provide "one-stop place" seriazation services (Dekker

et al., 2004). In the communication and collaboration with customers, the

customers, the third-party logistics providers increasingly need to

strengthen the strategic level of dialogue with customers understanding of

customer operations, and the implementation of joint innovation, further

improve service standards and operational efficiency. This has promoted

the emergence and development of sub-contractors (Knight, 2009).

In the new logistics market environment of China, third-party logistics

providers in order to select stronger sub-contractors, reduce transaction

costs, access to high-quality logistics services, they avoid communicating

with many logistics sub-contractors, but only with specific sub-contractors

to sign Logistics sub-contract in order to ensure stable and efficient and

controllable logistics services (Crainic & Laporte, 1998). In addition, the

two sides in accordance with the experience guard against errors, which

happen easily in co-operation process of subcontract logistics services, and

list a fairly detailed list and set standard model and provisions of contract

(Lambert et al., 2008).

Therefore, some third-party logistics providers, which have an advanced

concept of logistics services, closely around the value of customer-centric

transform and develop themselves, and actively develop the cooperation

with subcontractors.


12

2.5.3 Low trust level

The trust between 3PL providers and client firms and even between 3PL

providers and 3PL subcontractors are not high (Xu, 2003)

2.5.4 Dynamic external environment: both opportunity and challenge

Finally, because of accession to WTO, foreign third-party logistics enter-

prises are eager for Chinas logistics market, one after another enter China, Chinas third-party logistics providers are facing a serious challenge to foreign enterprises, China's third-party logistics providers will face two

options, either by merger and acquisitions, will be eliminated in the com-

petition; either from the supply, funds, large-scale networks into hand, in-

tegrate internal and external corporate resources to achieve a common

win-win road (Luo, 2008).

2.6 3PL risk control and management

To carry out effectively manage 3PL in risks could not be separated from

scientific and sound risk management process (Daganzo, 2005). The third

party logistics risk management has been classified into risk analysis and

identification, the risk early-warning and risk control three stages, as

shown in figure 1 (Niu, 2008). Through effective risk identification and

early warning of risks to achieve effective risk control and deal with the

process of economic cooperation to maximize the realization of win-win

situation (H Ballou, 2006). Because third-party logistics development changes as the external environment changes, therefore the process of risk

management should be viewed in a continuous cycle of development

(Simchi-Levi et al., 2005).

Figure 1

2.6.1 Risk analysis and identification

Risk analysis and identification means the analysis of third-party uncer-

tainty sources (Song, 2008), and then based on source of uncertainty to

analyze their identification and classify third-party logistics s risk factors

(Bottani & Rizzi, 2006). On this basis, for each risk factors causes, the loss or the consequences caused by risk brought about, as well as third-

party logistics providers overall impact, so as to risk early warning as well as risk control to provide the basis (Lambert et al., 2008).

2.6.2 Risk early warning

Risk early warning refers to the third-party logistics providers through se-

lecting the appropriate warning indicators to predict the logistics operation

within the overall risk status and the degree of risk-based alerts to risk

Risk analysis &

identification

Risk early war-

ning Risk control


13

managers (agencies) to respond appropriately to reduce the possibility of

subcontracting of third-party logistics risks, as well as the risk of loss.

Risk early warning is an important part of risk management (Deepen,

2007).

2.6.3 Risk control

Risk control refers because of risk analysis and identification, risk early

warning to develop third-party logistics classification Control strategies

and methods to deal with, and according to the key issues to take specific risk control measures and methods (Song, 2006). Risk control is the final

part of risk management (Harrison & van Hoek, 2005).

2.7 Summary

Through literature review, it has been found that risk is loss by indetermi-

nacy, which could be impacted by various factors. Contract management

and risks sharing are effective approaches in risk management fields. The

basic procedures of risk management are risk awareness, risk testing, and

risk assess, risk control and managerial effect evaluation. The risks of 3PL

are objective in practical operation, although 3PL are supported by many

strong reasons. It is summarised that ineffective management, loss of con-

trol, loss of client focuses, lack of clarify, lack of cost control, lack of cost

control, lack of trust and double outsourcing are main cause factors of 3PL

risks. In China the development of 3PL just started and is still in its early

stages, according to the limited scale, operation focuses and competition

modes. There is also an obvious trend that 3PL in China often use the help

of subcontractors. A framework of 3PL risk management and control is

formulated as well. The literature review obtained as above would be used

as theoretical framework to support this research.


14

3 RESEARCH METHODOLOGY

3.1 Introduction

According to the research objectives, this research is aimed to explore

whether there is risk in third party logistics in China identify direct causes

to such risks and find out practical approaches to manage and control these

risks. This chapter will discuss the research methodology and research

methods. Research philosophy will be determined at first then research strategy, methods for data collection and data analysis for this research

would be explained. Considerations will also be made on research validity,

reliability, generalisability. Research ethics would be ensured. After dis-

cussing research methodology and methods, the potential limitations em-

braced in this research will be pointed out.

3.2 Research methodology

The theory of how research should be carried out, including the theory and philosophy on which research is based and the impacts of these for the

method or approach adopted (Saunders & Lewis, 1997). Because the the-sis is based upon analyzing subcontract risk of the third party logistics in

China, so to get information such as some figures and situations about

TPL and its application is very important, the author will do some surveys

in China for collecting data in this dissertation. This chapter is the research

methodology in the whole dissertation. In order to get the correct data of

relevant data and information, library research is used for the author to get

data and correct useful information.

3.2.1 Research philosophy

Accoding to Bass (1993), the researchers aim is research phenomenon, research phenomenon turns it into science, and the science law can be ob-

tained by concluding phnomenon, so researchers mix the philosophy into

the science.

Walsham (1993) considers that people just interpret science from the sit-

uation of knowledge of reality, including the domain of human action,

which is a social construction by human actors and applies equally to re-

searchers. But the objective reality cannot indicate itself in front of re-

searchers, so researchers have to discover it and show it, in contrast to the

assumptions of positivist science. Bass (1993) indicates that, the reality is

based on external and real thing researched, the researches have to suit to

the reality. In the authors view, the research philosophy has to suit to the research phenomenon. Because Bass (1993) emphasizes that the theory

must be validate by the experience, and the science is based on the science.

The author needs to analyze the data to obtain the conclusion.


15

Saunder, (2003: 85) considers that Research philosophy are betterat doing different things. As always, which is better depends on the re-search question(s) you are seeking to answer this is agreed by the au-thor. For this reason the author would like truly to know the current situa-

tion of subcontract risk of TPL in China; the related issues of it; discuss

the development of strategies.

Positivism is a philosophy that holds that the only authentic knowledge is

that which is based on actural sense experience. Metaphysical speculation

is avoided. Max Horkheimer and other critical theorists criticized positiv-

ism on two grounds. Firstly, positivism ignored the role of the observerin the constitution of social reality and thereby failed to consider the his-

torical and social conditions affecting the representation of social ideas.

Positivism showed falsely the object of study by reifying social reality as

existing objectively and independently of those whose action and labor ac-

tually produced those conditions. Second, he argued that representation of

social reality produced by positivism was inherently and artificially con-

servative, helping to support the status quo, rather than challenging it

(Hacking, 1981).

Phnomenology comes from the Greek words phnomenon, meaning that which appears, and logos, meaning study. In Husserls and Willard (2003) conception, phenomenology is primarily concerned with making

the structures of consciousness, and the phenomena appearing in acts of

consciousness, objects of systematic reflection and analysis. Daniel Den-

nett has criticized phenomenology on the basis that it is explicitly first-

person approach is incompatible with the scientific third-person approach.

As part of an ongoing debate with Dreyfus and Warthall (2006) has argued

that much of the work done by phenomenological lllusion which is the mistake of assuming that what is not phenomenological present is not

real, and that what is phnomenology present is an adequate description of

how things really are (Smith, 2007).

In this research, phenomenology will be used as research philosophy. The

focus of this research will be put on the subjective understanding of 3PL

outsourcing risks. Therefore, the research philosophy of phenomenology is

much more suitable rather than positivism. Findings will be derived from

participants based on their factual experiences on this subject.

3.2.2 Quantitative versus Qualitative

Jobber, D. (2004) indicates that the quantitative research is sample to col-

lect real data, analysis the data after collection expediently. In authors view, the quantitative is very convenience to collect data, and analyze data

easily. According to Creswell, J. (1998), the value of this approach allows

standardizing the questioning to such an extent that a more numerate, sta-

tistically-based analysis is possible and permits you to test out hypotheses

more explicitly, always assuming the standardized. The quantitative ap-

proach is usually applied to scientific inquiry. It is characterized by deduc-


16

tive reasoning, objective investigation and precise and statistical meas-

urement.

The qualitative approach is defined as a systematic collection and analysis

of subjective narrative material. Inductive reasoning, subjectivity, discov-

ery and subjective description characterize this approach (Creswell, J.,

1998). It is more complex and difficult to evaluate resultsthan those gained from the quantitative approach because the study usually involves

people and formulation of conclusions based upon their attitudes, opinions,

experences, emotions, recollections and understanding.

Table 3.1 Differences between quantitative and qualitative

Quantitative Qualitative

Focus on meanings obtained from

numbers

Focused on meanings analysed from

words

Numerical and standardised data are

collected

Non-standardised data are collected

and require for categorisation

Statistics and diagrams are conducted

for analysis

Conceptualisation are conducted for

analysis

Source: Minocha (2006)

In this study, the author uses the qualitative method to collect data because

the author uses interviews to do the research, which is also because the

formulation of the conclusion based on peoples attitudes, opinions, expe-riences, emotions, recollections and understanding. In comparison to

quantitative research, qualitative needs more time and money to get the

answers and these answers may be different from various people.

3.2.3 Deductive versus Inductive

Induction and deduction have been used as two different ways to establish

theories and draw conclusions; induction is focused on evidence while de-

duction is based on logic (Ghauri & Gronhaug, 2005). It is usual to associ-

ate a positivism paradigm with deductive process and a phenomenology

paradigm with inductive process (Hussey & Hussey, 1997). In inductive

process, conclusion are drawn from practical observation and then used to

improve theories; by deduction, researchers draw conclusions through log-

ical reasoning (Ghauri & Gronhaug, 2005). The main difference is in in-

duction the conclusions acquired lead to build theories and hypothesises,

while with deduction, the conclusions are used to test these theories and

hypothesises (Clough & Nutbrown, 2007).

Due to phenomenology chosen as research philosophy, induction is appro-

priate for research methodology. The researches of third party logistics

subcontract risks are in infancy (Lau & Zhang, 2006). Therefore, it is

aimed to explore how third party subcontract risks in China could be eval-

uated and managed effectively in this research, thus it is hoped to bridge

the gap between theory and practice in inductive process.


17

Table 3.2 Differences between deductive and inductive approaches to re-

search Deductive approaches Inductive approaches

Scientific standards From theory to data Require to explain causal relation-

ships among variables

Quantitative data Needs to ensure data validity Needs to clarify definition Researcher is independent during

research process

Consideration in conclusion gen-eralisation with sufficient samples

Obtain a deep understanding A close study within the research

context

Qualitative data More flexible structure Researcher is a part of research

process

Less consideration with generali-sation

(Source: Saunders et al., 2000, p.91)

3.3 Research strategy

3.3.1 Primary data versus secondary data

Secondary data Data collected from existed sources are considered as secondary data

(Collis & Hussey, 2009). Compared to primary data, the utmost ad-

vantage of secondary data is significant saving in both time and mon-

ey (Ghauri & Geonhaug, 2005). Although the secondary data might

not fit the research problem, they are helpful and could facilitate re-

searches with high quality and reliable information which are collect-

ed by experts (Clough & Nutbrown, 2007). As Churchill (1999) sug-

gests, do not bupass secondary datastart with secondary data and then proceed to primary data.

In this research, it will start from secondary data through collecting

existed literature in third party logistics subcontract risks, and then

precede primary data in action research.

Besides, To gain the relevant information for this study the data must

be obtain from several reliable sources. This involves establishing that the sorts of data you require are likely to be available as second-

ary data and locating the data you require (Saunders, Lewis, 2009). The advantages of adopting secondary research are concluded by

Saunders: The main advantages of using secondary are that, it is much less expensive and time consuming to use such data. The time

saved from using data collected by someone else allows more time for

analyzing and interpreting the data. By reading many books about re-search methods and this dissertation itself limitations, another ad-

vantage is found by the author, it is more possible to provide higher

and exact quality information by undertaking secondary research than

obtained information by gathering information your own. Many sec-


18

ondary data avaliable for the research can be collected from that will

be shown in the reference part.

Primary data Primary data are data collected from an original source, such as own

researches, surveys, and interviews (Collis & Hussey, 2009). The

most significant advantage of primary data is that these data are gen-

erated for particular projects; therefore, they are much more consistent

with research objectives (Ghauri & Gronhaug, 2005). In this research,

it is aimed to know peoples attitude and cognition to the risks in third party logistics subcontract, only primary data could be able to answer

such questions. Therefore, primary data will be collected in this re-

search.

However, collecting primary data is time and money consuming

(Hussey & Hussey, 1997). It might be difficult to get access and find

the appropriate respondent to answer the questions (Ghauri &

Gronhaug, 2005). Also, there are also weaknesses existed in the relia-

bility and quality of primary data.

3.3.2 Interview

Accoding to Collis and Hussey (2009), interview is a method to collect

primary data by asking questions to find out the answers to research ques-

tions. Interview refers to the face-to-face exchanges between analysts and

employees. It is a way to deepen the understanding of analysts to the em-

ployees in order to obtain more work information. Their specific practices

include personal interviews and interviews between the management staff

(Jobber, D., 2004).

The merits of the interview survey

1. Flexibility 1) This kind of survey flexible and convenient, the interviewers

can collect the different types of materials from different types

of people according to the needs of the survey.

2) The interview survey is the process of communication be-tween the interviewers and interviewees. This method has

greater flexibility; the issues of survey are designed based on

the general situation and interviewers subjective development, some cases may not be considered very well.

2. Accuracy 1) Interview survey is the direct communication between the in-

terviewers and interviewees. Interviews can make an effort to

eliminate the concerns of the interviewees and make them re-

lax; it can make the interviewees answer questions after con-

sideration, which can enhance the authenticity and reliability

of the survey materials.

2) Interview survey needs to determine the scene first; the inter-viewers can properly control the interview environment to


19

avoid interference from other factors, the time and content of

the interview also can be arrangeed flexible.

3) Because of the faster interview process, respondents often do not have long time thinking in response to questions, so the

answers are often the spontaneous reaction of the respondents,

so this kind of answers are real and reliable.

4) As a result of the face-to-face interview, fewer respondents refused to answer. Even if the respondents refused to answer

certain questions, we also can understand his attitude on the

issues.

3. Depth 1) Interviewers can directly contact with respondents or indirect-

ly contact by telephone or internet with the opportunity of ap-

propriate explaination, guidance and asking, so it can explore

the more complex issues, which can be able to acquire new

and deep-level information.

2) In the course of face-to-face conversations, the interviewers not only collect information from the respondents answer, but also observe the action of the respondents or non-verbal

behaviour as the reference to identify the authenticity of the

content and the respondents psychological state.

In comparison, questionnaires are impersonal, this means that it may be

difficult to understand answers and thus to act on them. Also, there is a

chance that the question may be misinterpreted, rendering the answer use-

less. Questionnaires also invite people ti lie and answer the questions very

vaguely which they would not do in an interview. Open questions can take

a lot of time to collect and analyze. People are not always willing to fill

questionnaires in so they may just throw them always. Sometimes ques-

tions used are too standardized (closed) so some people preferred answers

may not be included, and this does not allow for much detail. Peer pres-

sure of embarrassment may cause people not to answer certain questions,

or they may want to impress the researcher and fabricate the truth by fill-

ing in unture answers, making questionnaires unreliable and sometimes

invalid (Hague, 2002).

Therefor, this dissertaion will take an interview as the research method.

3.4 Data collection

3.4.1 Sampling

According to Creswell, J. (1998), sampling means saving work by exam-

ing the sample instead of the whole population. There are two samples in

this research, managers who work in Shenghui Logistics Company (inter-

viewee (A)), and the customer who have sated in Shenghui Logistics

Company (interviewee (B)).


20

Two interviews were conducted in this research. The first one was with

the General Manager and the remainder with Business Department Man-

ager. They have very important positions in Shenghui Logistics Company;

their jobs have much to do with the contract of the 3PL. apparently, the

General Manager has great influence in formulating strategies. It is gener-

ally not sufficient to only interview only one manager in a study relating

to the 3PL client organisation was carried out as well to obtain more data

and information for the analysis.

The research used a non-probability sample technique because it provides

rich in-depth information in order to answer the research question and

achieve the objectives. Creswell, J. (1998) agreed that purposive or judg-

ment sampling enables the researcher to use personal judgment to select

the key person to give relevant information to answer the research ques-

tion and to meet the aim and objectives.

3.5 Data analysis

Due to methods in this research, qualitative data are collected in a primary

manner. In literature, the relative infancy of qualitative data analysis

methods are discussed and highlighted. According to Lancaster (2005), the

most serious and difficult issue existed in the use of qualitative data is the

approached of data analysis are not well formed. Saunders et al. (2007, pp.

472) point out qualitative data analysis should be focused on the meanings

expressed through words and conduct through the use of conceptualisa-tion.

As Saunders et al. (2007) suggest the general set of procedures in qualita-

tive data analysis involve following activities:

Categorisation Unitising the data Recongnising relationships and developing categories Developing theories to reach conclusion

In this research, the data analysis will follow the way as the suggestion by

Saunders et al. (2007). Firstly, the data collected from interviews will be

categosised into different themes. The next step is thus to unitise these da-

ta within categories with the aim of data reduction and simplification. At

the end of the process, the data is hoped to be arranged into a more man-

ageable and comprehensible form for research (Bryman & Bell, 2007).

Then, the focus will be engaged in the process of data analysis by search-

ing answers to key themes and recognising the relationship between them.

Finally, the condusions will be reached and it is hoped to enrich present

theories to fulfil the inductive objectives of this research.

3.6 Limitations

In the process of preparing for primary research, the author found that it is

difficult to get enough information for analysing TPL since the author

couldnt find enough professionals and because of some special require-


21

ments for the respondents, so the author cannot use primary research in

EU to gather data but have to do this in China. It is not easy to overcome

the problem. Initially, the author prepared to make more secondary re-

search in the project before facing the problem. And another problem is

that this dissertation aims to identify the risk factors and risk alarm model

of TPL subcontract so it has to be based on some formal evidance. The au-

thor could not get enough primary data to make it enough persuasive. And

the last problem is due to the limitations of deadline and knowledge from

the author. However, the author still studies the knowledge how to con-

duct a secondary research and techniques, which is used in the process of

research.

The limitation of the interview survey (Campbell, D., Stonehouse, G.,

Houston, B., 2002)

The higher cost Interview survey often adopts the face- to-face individual visits, the

face-to-face communication have to find the respondents, the time

wasted on the road often exceed on the interview, the situation of re-

fusing to be interviewed will occur during the investigation, so more

time and energy will be spent; the other large-scale interviews often

require a number of interviewers with staff traning, which makes the

cost of spending greately increased. Compared with the questionnaires,

interviews have to pay more time, manpower and material resources.

Because of the large cost of the investigation and time-consuming, it

is difficult to carry out with large-scale, so the general scale of inter-

view survey is smaller.

Lack of privacy Because the interview survey requires the respondents to answer the

questions face-to-face, this makes them feel they have a lack of pri-

vacy, especially on some sensitive issues, the respondents tend to

evade the truth or not answer.

Influence by the interviewers Interview survey is conducted as a result of a separate survey; differ-

ent personal characteristics of interviewers may lead to the psycholog-

ical reactions of the respondents, thus affecting the content of answer;

and the two sides in the interviews are often strangers, which can easi-

ly make the respondents no confidence and affect the interview results;

in addition, the interviewers values, attitudes and the level of talking will affect the respondents, which may result in the deviation of the

interview results.

Difficluties in recording Interview survey is the language exchange between the two sides, if

the respondents do not agree with live-recorded, so it has to use the

way of hand-writing, but generally do not have specialized training in

shorthand interviewers, so it often cannot completely record the con-

tent of the conversation and make a lot of information missing.


22

Difficult to deal with the result Though the interview survey is flexible, but it also adds to the arbi-

trary course of the investigation. Different respondents have different

answers on the questions, so it is complicate to deal with the results of

interviews.

3.7 Ethical issues consideration

The ethics was taken into the research. The researcher has read books re-

lated to ethics. So the author will choose people who have been 18 years

old and they are able to answer questions objectively during interviews.

Interviews are dusigned for interviewees dose not suffer any discomfort,

physical harm, embarrassment, pain, and disclosure of privacy. So the au-

thor will design these interviews based on safeguard interviewees right.

Interviewee will be informed that their right will be adequately protected,

and if the author asks any sensitive question, interviewee can refused to

answer question, because questions makes them uncomfortable.


23

4 FINDINGS, ANALYSIS AND DISCUSSION

4.1 Introduction

In this chapter, it describes the findings derived from the research, carries

out analysis to these findings and discusses them. The author designed in-

terview questions and has interviews with interviewers (manager and staff

in 3pl provider and customer who use 3PL service of case company).

Questions of interviews based on research question and try to identity de-

tailed problem in 3PL Subcontract. Answer of interview would be inte-

grated and mentioned as followed; logistics Subcontract risks which relat-

ed to literature review will be mentioned, compared, and discussion in this

chapter.

4.2 Findings on 3PL advantages

According to interview with interviewee (A) and interviewee (B), it is

found there are numerous benefits for using third party logistics, which in-

clude:

According to interviewee (A), 3PL allows firms to focus on develop-ing their core competences. In order to strengthen the market competi-

tion capability, many enterprises put capital, personnel and resource to

their skilled businesses, to seek the maximum benefits and the effi-

ciency of socialized divided work. The result of professional divide

work has lead many non-core businesses to separate from the activi-

ties of manufacturing management in enterprises.

Great savings and benefits. The interview (A) found that third-party logistics brought about benefits such as distribution savings, greater

control of business, better customer service and satisfaction, and the

addition of expertise to supplement the capabilities of the internal or-

ganization. Other benefits include reduction in capital investment in

facilities, equipment, and information technology, improved customer

service and delivery and reduction in the complexity of logistics oper-

ations.

Also the author sums up points from interviewee (B):

Using 3PL results from economies of scale and economies of scope

Using the third-party logistics to do logistics business may reduce cost of logistics, as well as perfect the service functions of logistics activi-

ties

Transportation facilities and storage are controlled by the third-party logistics; the third party logistics could also provide the whole man-

agement service and some special services.

The third-party logistics providers can stretch the risks by subcontract-ing to sub-contractors.

Freeing up resources (for example, money)


24

4.3 Findings on 3PL disadvantages

Although interviewee (B) provided many benefits of use 3PLs service, it is found there are abvious disadvantage of 3PL in practice as follows:

Loss of control over the logistics function (critical parts)

More distance from clients. Loss of human touch.

Discontinuity of services of 3PL provider

Differences of opinion or perception of the service level of the third party provider

4.4 Findings and analysis on methods to select 3PL providers

According to talk with interviewee (B), it is important to select the third-

party logistics service provider, which has the ability to provide much bet-

ter services and new value adding capabilities to the logistics users. Not

surprisingly, the most important and prevalent criteria for using by indus-

tries to evaluate and select third party logistics service providers are relia-

ble. If the industries cannot select the reliable 3PL provider, the economic

losses will be suffered by them. However, the judgment and selection of

the 3PL providers is difficult to the logistics users. Therefore, the indus-

tries are necessary need to carry out the criteria to select the 3PL provider

who has the ability. If subcontracting is to be used as a strategic tool, 3PLs

must not only support current. Logistics needs but also extend and provide

new value adding capabilities to the logistics users. The logistics users

should place higher premium and emphasis on selection criteria, such as

ability to add value to products and availability of international operations

and networks.

The criteria used to select third-party logistics provider in practice include:

Reliable

Consistent service

Flexibility

Service cost

4.5 Findings and analysis on risks existing risks in 3PL operation

4.5.1 Risk 1: the market of logistics subcontracting is immature

In the process of interview, it is found that interviewee (A) and interview-

ee (B) have common views, whether the companys logistics subcontract-ing is successful based on the third party is tightly connected with whether

the market of logistics subcontracting is mature. If the market of logistics

subcontracting is immature, then there is rarely the service contractor that

provides the third parts logistics, or even if there are some service con-tractors of logistics of the third part in the market, but these companies do

not have qualification proof. In this case, if the company wants to under-

take logistics subcontracting, then it must increase the cost of collecting

information about logistics service providers, the cost of monitoring dur-


25

ing the process of subcontracting operation, and the cost of conversion for

changing service, that is to say increase the cost of business. Thus, it caus-

es the companys hope of cutting down the cost through subcontracting which lowers the cost of logistics to become futile. In an immature sub-

contracting market environment, the company experiences high risk, and

the probability of success is too slim.

4.5.2 Risk 2: the objectives of logistics subcontracting are not clear

The interviewee (A) indicated, if the company wants to outsource logistics

to a third-party logistics company, it must have a very clear objective. Dif-

ferent companies have very different objectives of logistics subcontract-

ing. For example, the companies producing functional products (house-

hold appliances, daily necessities etc.) and the companies producing inno-

vative products (mobile phones, computers, clothing etc.) have completely

different objectives. The following hopes the logistics subcontracting can

cut down the cost of logistics subcontracting, and improve the service of

logistics subcontracting; the latter pay more attention to shortening the lo-

gistics cycle through logistics subcontracting so as to response to the fast-

changing trend of the market timely. If the companies that produce func-

tional products focus more on shortening logistics cycle through logistics

subcontracting so as to response to the need of the market, while the com-

panies that produce innovative products focus more on cutting down the

cost through logistics subcontracting, then it is the biggest mistake. So the

objectives of logistics subcontracting must be clear.

4.5.3 Risk 3: the scope of logistics subcontracting cannot be determined

Also according to interview (A), if the scope of logistics subcontracting

cannot be determined, it will lead to the resource of logistics get fragment-

ed. If the company makes the close-connected logistics resources subcon-

tracting partly or subcontracting to different and separate service provid-

ers, it may lead to serious problems of communication and coordination.

When there is any problem, different service providers tend to shirk their

responsibilities mutually; it is easy to cover the truth. Surely, the con-

cerned factors are many, but if the proper business pattern of logistics sub-

contracting, the risks will decrease.

On the other hand, if the company cannot determine the proper scope of

the logistics subcontracting, it will lead to the risk that company to lose the

opportunities of learning and training the core competitive power. Some-

times the improper sector of logistics subcontracting may break the reac-

tive relations of the activities from the design, produce to the transport as a

whole, thus it will influence the core competitive power of the company.


26

4.5.4 Risk 4: the position set for the contractor is not exact

The interviewee (A) thinks that with the features of logistics outsourcing

that there are four relationships between the company of logistics subcon-

tracting and the 3PL: reciprocal strategy, client dominant strategy, vendor

dominant strategy, and preferred vendor strategy. When they both exit in

an open and competitive commercial environment, and have the balanced

ability of negotiation, the reciprocal strategy can be adopted; when the

company separates the logistics to control the resources effectively, and

sign many service contracts of short time and small range with many ven-

dors to get the lead, the client dominant strategy can be used. When the

company puts most or all of the logistics to the vendors, this relationship

of subcontracting is vendor dominant strategy; when they share the fruit

and the risks of subcontracting together, preferred vendor dominant strate-

gy can be adopted. These four relationships should response to different

strategies of logistics subcontracting respectively. If the strategy of logis-

tics subcontracting and relationship positioning are dislocated, it will inev-

itably lead to a corresponding risk.

4.5.5 Risk 5: make an error in choosing contractors

From the interviewee (B) perspective, choosing a wrong 3PL is a big po-

tential risk. To choose proper contractors is a key sector to make success

for the company in competition, and it means with a careful, all bets are off Choosing contractors of logistics is for lowering the cost, guarantee-ing the quality and the delivery and bettering or improving financial con-

dition. In addition, when the company chooses the contractor, it will select

it by tender, in this way, it will not only consider the price and quality, but

also consider the qualification and credit. However, in the process of the

real assessment, the company tends to evaluate and choose the contractors

qualitatively according to a certain experience because there are many un-

certain factors influencing the decision. To some extent, there is the sub-

contracting in the interest of the department or individual, so that the as-

sessment and choice for the contractor cannot be objective and impartial,

which leads to the risks of the logistics subcontracting. Because the infor-

mation between the company and the contractor is not symmetrical, and

the contractor knows more than the company about its own qualification,

real strength of technology and the service that it can provide, they are

likely to provide the company inadequate and false information. It leads to

adverse selection the company chooses the contractor improper to its real condition.

4.5.6 Risk 6: wrong decisions of logistics subcontracting

Generally, logistics subcontracting needs to experience the strategic level

of logistics subcontracting decision-making, and a tactical level of logis-

tics subcontracting decision-making. Both of interviewee (A) and inter-


27

viewee (B) think at the level of the strategy, the core problem of logistics

subcontracting is whether the subcontracting is feasible. It mainly de-pends on whether logistics is a key business. If it is not, then logistics sub-

contracting is feasible; if it is, then logistics subcontracting is not feasible.

In the process of strategic decision-making, the risk of logistics subcon-

tracting primarily lies in the company cannot judge whether logistics sub-

contracting is core business accurately. On the other hand, at the level of

tact, the decision-making needs to analyze further logistics subcontracting

that is feasible in strategy to determine selective subcontracting or complete subcontracting. In the process of strategic decision-making, decision-making of logistics subcontracting directly conditions the risks

and profits of logistics subcontracting.

4.5.7 Risk 7: sign improper contract with the contractor

The rigorous subcontracting contract is the beginning of a successful sub-

contracting. The interviewee (B) deeply agree this point, it can bind two

parties properly. Once disputes arise due to divergence of interests, they

can have criteria to consult. However, in real operation, the company often

signs standard contract with the contractor of logistics subcontract-ing.Because the contractor is more experienced and dominant in logistics

subcontracting technical indicators, so the rigid contract including very de-

tailed technical indicators is inevitable to hide extra fees behind these indicators. At the same time, since the technology renews quickly, the

contractor lacks stimulation from company, it will limit the application of

new technologies or avoid reducing the cost of services instead.

4.5.8 Risk 8: the conflict of the inner labours

For this point, the interviewee (B) show his concern; logisics subcontract-

ing tends to influence internal processes of company, and needs to restruc-

turing of the companys internal business process. This process is very likely to influence all the staff, so it is resisted by the staff and has a nega-

tive impact on the normal business of company.

4.5.9 Risk 9: management information leaks

The interviewee (B) said indicated in order to adapt to changing market

conditions and customer demand, the company of logistics subcontracting

secretly changes the product structure without timely communication with

the third-party logistics providerswhile the logistics providers still pro-vide logistics service for company in the original model. It may cause re-

sistance in a particular aspect of logistics operation, which cannot get the

expected logistics performance and it causes unnecessary loss. If the com-

pany truthfully informs the third-party provider the product structure ad-


28

justment, since the third party leaks the development strategy of company

carelessly, once it is known by the competitors of company, the company

will be trapped into passive state and make a huge loss.

4.5.10 Risk 10: there is no effective evaluation of service performance

According to talking of interviewee (B), the customer cannot evaluate ser-

vice of 3PL successfully, because lacking professional people and tool,

they cannot judge whether the 3PL service is good or not. However, when

the company uses the third party to gain service, it tends to have risk of

getting out of control of valuable management information. In the process

of the logistics subcontracting operates, the company must establish effec-

tive service indicators and evaluate logistics performance. This evaluation

includes logistics fee test and service performance test. Performance eval-

uation indicators should evaluate systematically the whole logistics opera-

tion process of the third party, accurately

Haimeng Wang

Documents

Transcript of Haimeng Wang